Loeb Takes Activism Abroad With Sony Stake in Japan Wager

Hedge-Fund Manager Dan Loeb wrote, “Many casual observers would be surprised to learn that while Sony is electronics, much of its current value is derived from a hidden gem –- Sony’s entertainment division.” Photographer: Simon Dawson/Bloomberg

May 15 (Bloomberg) -- Dan Loeb, the hedge-fund manager who
successfully pushed for an executive shakeup at Yahoo! Inc., is
taking his activism overseas for the first time with a $1.1
billion stake in Sony Corp., seeking change in a country where
few U.S. investors have succeeded with that approach.

Loeb, whose event-driven fund has returned an annual
average of 18 percent since he started his firm out of another
manager’s weight room almost two decades ago, chose Sony as part
of a wager that Japan’s stocks will gain as Prime Minister
Shinzo Abe uses stimulus spending and aggressive monetary easing
to spur growth.

Third Point LLC, Loeb’s $12.9 billion firm, has profited
this year from wagers that Abe would successfully devalue the
yen, improving the competitiveness of the country’s exporters
and boosting stocks. Geography aside, the New York-based firm
often targets companies the hedge-fund manager sees as mispriced
because they’re misunderstood by equity markets, even when he’s
not agitating for change in a so-called activist holding.

“Many casual observers would be surprised to learn that
while Sony is electronics, much of its current value is derived
from a hidden gem –- Sony’s entertainment division,” Loeb wrote
in a May 14 letter given to Chief Executive Officer Kazuo Hirai
and obtained by Bloomberg News. “Like many conglomerates we
have invested in previously, Sony has two strong businesses
facing different challenges side by side, each obscuring the
other’s true worth.”

In his letter, Loeb asks the company, whose market value
has shrunk almost 90 percent from its peak, to sell as much as
20 percent of its Sony Entertainment unit. The breakup would
allow the company to focus on its struggling electronics
business, he said.

Greek Fund

Elissa Doyle, a Third Point spokeswoman, declined to
comment on the firm’s Sony investment.

While Loeb has long invested globally, he’s been
increasingly focusing outside the U.S. over the last 12 months.

He told investors in April he was starting a hedge fund
focused on buying Greek assets, after a bet that European
officials would rescue the indebted nation from financial
collapse helped drive gains last year to 21 percent.

In a first-quarter letter to clients, Loeb said he visited
Japan in April 2012 following the Bank of Japan’s announcement
of a new policy targeting a 1 percent annual inflation rate to
spark economic growth. He came away convinced “the articulated
‘changes’ were more rhetorical than practical at the time,”
according to the letter.

Pickens, TCI

Later in the year, as it became clearer that Abe would be
elected, Loeb started to believe that after more than a decade
of deflation, the incoming political leader’s “reflationary”
policies would bring dramatic change where central bankers had
failed, he wrote.

U.S. managers have attempted activist campaigns in Japan
with limited success since at least the early 1990s, when T.
Boone Pickens was thwarted in a bid to get board seats at auto-parts maker Koito Manufacturing Co.

Of almost 800 forays by activist investors in the country
from 1998 to 2009, only about one-third managed to effect any
change, according to a study from researchers at Kobe University
and the University of Southern California.

Christopher Hohn’s Children’s Investment Fund Management
LLP tried in late 2005 to get Tokyo-based Electric Power
Development Co., known as J-Power, to increase dividends, force
the disposal of cross-shareholdings and require independent
members on its board. Three years later, Hohn gave up and sold
his shares at a loss of about $130 million.

Activist Grandmother

More recently, some firms have gotten better results.

Two years ago, TCI, as the London-based hedge-fund firm is
known, tried again, this time focusing on Japan Tobacco Inc.,
then majority-owned by the government. The company is returning
more than 100 percent of profits to shareholders in the form of
dividends and share buybacks this year, two moves encouraged by
the fund in a 2011 letter, according to Oscar Veldhuijzen, a
partner at the fund company.

Loeb also held shares in Japan Tobacco, according to his
firm’s April report to investors.

A Los Angeles area native, Loeb, 51, first learned about
the stock market from his maternal grandmother. A social worker,
she invested her savings in industrial companies in the 1950s
and ended up with a nest egg of several million dollars by the
time she died. She also introduced him to activism, showing up
at annual meetings and asking management why there were no women
on the board.

Yahoo! Shakeup

Loeb traded throughout college, first at the University of
California at Berkeley, and then at New York’s Columbia
University. He amassed $120,000 by his senior year, only to lose
it all on one stock -- medical respirator maker Puritan Bennett
Inc.

He started Third Point in 1995 out of hedge-fund manager
David Tepper’s weight room after stints as an analyst at
private-equity firm Warburg Pincus LLC, head of corporate
development at Island Records Inc. -- home to reggae star Bob
Marley -- distressed debt analyst at brokerage firm Jefferies &
Co. and high-yield bond salesman at Citigroup Inc.

Loeb, while not primarily an activist investor, has
profited by making noise at U.S. companies.

He triggered last year’s ouster of former Yahoo CEO Scott
Thompson and won a board seat at the Internet company. Yahoo was
Third Point’s biggest money-maker in the first quarter, and one
of its most profitable investments last year, according to
letters sent to clients. The stock rose 18 percent in the first
quarter and 23 percent in 2012.

With his investment in Sony, Loeb hopes the company will
become a leader in how business is done in a resurgent Japan.

“As Finance Minister Taro Aso recently wrote, ‘in many big
Japanese companies, success in the past led to inflexibility and
risk aversion,’’ Loeb said in his letter. ‘‘Strengthened
corporate governance may be needed to change the way they do
business and facilitate open innovation.’’